The high-performing ASX stock flying under the radar

Tower (ASX: TWR), a New Zealand-based insurer, stands out as an intriguing stock with an attractive yield, yet remains largely unknown to most investors.

Tower primarily offers general insurance products to customers in New Zealand and the Pacific Islands. Their main insurance offerings include home and contents insurance as well as car, business, landlord and boat insurance.

As a Kiwi-born company, Tower has deep roots in New Zealand and understands the local market well. The insurer is dual-listed on both the Australian and New Zealand stock exchanges, reporting its financial results for the year ending September 30.

Let's take a closer look.

Upgrades galore

Tower has demonstrated exceptional performance in 2024, with five consecutive earnings upgrades:

• 14 February – Full-year underlying NPAT expected to be at the upper end or exceed the previously advised range between $22 million and $27 million

• 17 April – NPAT is expected to be greater than $35 million

• 11 June – NPAT is expected to be greater than $40 million

• 8 August – NPAT is expected to be greater than $45 million

• 11 October – NPAT is expected to be around $83 million

Tower explained that its previous guidance had conservatively assumed full use of the FY24 large events allowance, set at $45 million. However, with no large events occurring during the financial year, this unused allowance has substantially boosted the expected underlying NPAT by $32 million (the $45 million allowance minus tax). This upgrade, initially hinted at during the company's half-year results on September 6, was officially confirmed in today's announcement.

The series of positive earnings revisions throughout the year has propelled Tower's share price, up 114% year-to-date, with minimal pullbacks.

Tower year-to-date price chart (Source: TradingView)

Bouncing Back

2024 marks a significant turnaround from the previous year's $1.2 million loss, which was primarily attributed to:

• Large event costs increased dramatically to $55.6 million, up from $19 million in 2022

• These events included the Auckland and Upper North Island weather event, Cyclone Gabrielle in New Zealand, and Cyclones Judy and Kevin in Vanuatu

• Widespread inflation increased overall costs

• Rising crime rates, particularly in motor vehicle theft, impacted claims

Where to from here?

Tower completed a strategic review on 6 September and outlined the following initiatives:

• Reaffirmed ordinary dividend policy of 60-80% of adjusted earnings

• Intends to pay a final dividend of 5 cents per share (the stock trades ex-dividend in January and June each year)

• Approved a return of NZ$45 million of excess capital to shareholders, by way of mandatory share buyback

For the year ahead, Tower secured a more comprehensive reinsurance program for FY25, with increased catastrophe limits. This provides better protection against large-scale events and could lead to more stable financial performance.

However, the increasing frequency and severity of weather events remain a significant risk to Tower's profitability, as evidenced by the poor results in 2023.

The New Zealand economy faces challenges, having entered a technical recession in late 2023 after two consecutive quarters of negative GDP growth. In response, the Reserve Bank of New Zealand recently cut interest rates by an unexpected 50 basis points to stimulate economic growth and consumer spending. This economic backdrop could also impact Tower's business.

Challenges and considerations

Despite its strong performance, Tower is an extremely illiquid stock. It's averaged 40,800 shares worth of daily volume (approximately $50,000) over the past 20 trading sessions, making it very challenging for investors to build a meaningful position without impacting the share price.

The stock's massive year-to-date run and muted reaction to today's earnings upgrade might also suggest that much of the good news is already priced in.